Landlords’ confidence in buy-to-let has fallen in the last three months, but remains robust, according to the latest landlord sentiment survey conducted by LSL Property Services plc

The survey indicates that 42% of landlords believe now is a good time to invest in property, a slight drop from LSL’s last sentiment survey in Q1 2010 (48%). However, only 2% of respondents believe that now is a good time to reduce their portfolios.

One third (32%) of landlords polled are likely to expand their portfolio in the coming twelve months. The number of landlords considering leaving the sector has risen by 6% in the past three months to 19%. This figure also includes investors who are leaving the market through retirement or lifestyle reasons.

The survey evidence is supported by LSL’s latest Buy-to-Let Index, which reported the drop in total annual returns from 13.2% in April down to 10.1% in July.

David Brown, managing director of LSL Corporate Client Department, said: “Rising rents and house prices offered landlords bumper annual returns at the start of the year, and was reflected in a surge of confidence. This has fallen slightly following the slowdown in house prices and the recent capital gains tax hike. But the vast majority of landlords remain committed to buy-to-let. Attractive rents – just £12 per month shy of their peak - and increasing yields underpin their confidence in property investment.”

Growing tenant demand is helping to cushion slowing capital gains. 37% of landlords have witnessed an increase in tenant demand, with one in ten landlords reporting a substantial growth. Just 7% of respondents saw a decline in demand. 63% of landlords expect this increase in demand to continue in the next two years compared to the one in twenty landlords who anticipate that demand for rental property will fall away.

LSL say that although landlords recognise the slight improvement in buy-to-let lending in the past quarter, just one fifth of respondents (21%) mentioned the availability of cheap finance as a positive factor for buy-to-let investment – an increase of 8% compared to the previous quarter.

Brown continued: “Mortgage finance remains a daunting obstacle for those looking to get a foot on the property ladder. This is keeping thousands of frustrated buyers in rented accommodation, pushing up tenant demand and rents. But borrowing remains a thorn in the side of potential investors too. Despite a slight easing in lending in the last quarter, mortgage finance constraints are hitting landlords. Funding conditions remain tight for lenders, and lending to landlords won’t loosen significantly in the next two years.”